The following keynote address was given at the 25th Denver Gold Show in Denver, Colorado, on September 15, 2014. Afterwards, we were advised by more than one person in the audience that the text was “depressing.” We had thought that the implications of our central thesis — there just isn’t enough gold to make a good business out of it — was wildly bullish for gold. One gentleman, a well-known executive, quipped: “Umm, it did not come through like that,” with a slight grin on his face. We responded by pulling out a phone and quoting a few pas-sages from the a place near the end. “You must put,” he advised, “the good parts at the beginning of a talk. By the end of a talk it is too late.” Being a very effective public speaker, we will take his advice. Here is what we would feel to be our key takeaway: “The outrageous spiral of credit that we now see will one day have to be monetized and when it is, it is to us where finance will turn. And next time around there will be much more credit chasing far, far less gold.” Isn’t that bullish enough as to the implications for the gold price? We thought so. Ok, so now for the depressing parts. We note that there have been some minor corrections made but otherwise what follows remains faithful to the text given at the show.
We first came to Denver, to this show, fifteen years ago, back in 1999. Gold had been mired beneath $300 and all hope had been lost. Yes, there was the sugar high of the Washington Agreement, but all that got us was two dam-aged companies. It felt like the end of the world. Central banks were going to sell all their gold at any price. The US dollar was on a tear. Tech stocks were booming. There was peace in our time. The end of history was clearly bearing fruit.
The report we wrote about the conference was entitled “Beer and Skittles at the Rock Bottom.”
In such an environment gold as an asset class was pretty much done. And then rhetoric at the conference pretty much reflected that. It was all about cash costs and mak-ing do in any price environment, development and regeneration costs be damned. “What we actually mine is be-sides the point”, to paraphrase one company’s message, “we are a business first and foremost and our aim is simply to make money.” Gold’s monetary qualities were a topic that dare not speak its name. Instead, there was talk of an effort to engage an advertising agency to peddle the metal as jewelry. Gold wasn’t money, rather, it was bling.
For the gold bugs amongst us, which, from what we could tell, was pretty much everyone from the investor contingent, it was a pretty dark time. One geo we knew, a geo who went on to make one of the very few major discoveries, was sleeping on his mom’s couch. Another had had his front tooth knocked out, but didn’t have the dough to see a dentist. Instead, he used glue to affix the knocked-out part back on to the stub. The problem was, it was dissolvable glue. So that meant that when he went around looking for money so that he could make option payments, he only had about 30 minutes or so in front of potential investors to make his pitch. If he couldn’t get his pitch in in that time frame, the knocked-off bit would fall out again. Dark times indeed.
Of course, as it turned out, the end of history was proven to be somewhat premature. As we all know, the metal proceeded to move from sub-$300 to almost kiss $2000 over the ensuing twelve years or so. Our community posted some good numbers over this period, at least for a while, and this was while equity markets in general largely treaded water. Vindication was at hand. Our friend got his tooth fixed.
The economic hit here was bad, but the reputational hit was far worse. We were right on our investment premise – monetary disorder was at hand as comeuppance for credit run amok – and we went and squandered the opportunity. The last two years have confirmed the suspicions of our sector – not only are we alarmist yahoos, we are also terrible businessmen, not to be taken seriously. Just go look at the tape, generalists will tell us: the brightest investors in the gold business were in aggregate outperformed by a hunk of metal. And that is be-fore deducting management fees.Since these more frothy times we have, obviously, had a pullback. But the metal belies how bad things really are now, a sentiment I am sure we all can share. Some of us are surely better off now than we were in 1999, but many of those who invested in golds are not. If the metal still shows some measure of respect, the shares do not.
We, as a community, must take some responsibility for this. The critics have a point: we did squander an epic opportunity. We called the market. We called the macro direction of the globe’s economic direction for a decade out. We were right. And then we went and blew it. I can only speak for myself, but this does not reflect well.
Of course now, 15 years on from the nadir of 1999 we find ourselves in the nadir of 2014. The parallels are eerily similar. There was an old bumper sticker that was popular in the oil patch in the early eighties which read: “Please God let there be another Oil Boom. I promise not to piss it all away next time.” With techs flying, with equity multiples speaking to never ending nirvana, with risk being for cowards and with the end of history once again firmly within our grasp, we will surely get another boom in bullion. We will get a second chance. The question before us today is, when we do get that second chance: what must we do so that we don’t go and blow it again.
Could we have done better?
I think in our heart of hearts we all know that we could have done better. But for sake of the record, let’s re-view how much we could have done better.
Between 1999 and 2013 gold rose by 600%, or about 13% if compounded annually (Figure 1). Even after the pullback this is nothing to sneeze at. If any of us could knock back these numbers out year after year we’d find ourselves in a book somewhere.
This is not to say other commodities also didn’t do well over this period. They did. Copper moved from about 60¢ to $3 while oil went from $12 to $100. In this regard, gold did not outperform. But insofar as the rise of the commodity complex reflected the shrinking value of the money, a concept held dear by the gold bugs, I suggest we should take credit for the commodity performances as well.